In an investment landscape colored by hedge funds, central banks and high frequency trading, its easy to forget about the basics. The notion of the research we recently added to our repertoire is grounded in the simple economics of supply and demand.
The hypothesis is that stock market prices are determined in the same way that the price of any good is set in an open marketplace. As the number of shares available in the stock market changes (i.e. shift in the supply curve), the price of stocks in general must also change. As liquidity for key market participants change (i.e. shift in the demand curve), the price of stocks in general must also change.
Before we go on to describe this strategy any further it might be helpful to review day one of high school economics class. If you have ever studied economics, even at a cursory level, you will probably be familiar with the following supply and demand graph.